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“What are the best ways to save for college outside of a 529 savings account?”

This week, we are focusing on college savings. October is a busy month for those with college age children, and many are looking at a FAFSA form for the first time, or touring schools at the top of their list and getting sticker shock. So I thought it was fitting to touch on a few college savings topics this week.

Today’s question is:

“What are the best ways to save for college outside of a 529 savings account?”



First, I will say that 529s are tough to beat due to their tax free growth of investments and tax breaks that many states give.

But, if your child does not go to college, or gets a large scholarship, you can incur taxes and a penalty on the leftover savings within a 529. For some this may be a deal breaker. So what other options exist besides a 529?

First option, use withdrawals from an IRA or Roth IRA. If used for qualified education expenses, you will not incur a 10% penalty on money withdrawn from an IRA. If a Roth IRA has been open for at least 5 years, you can withdrawal your contributions, but not earnings, penalty free.

Next option, savings bonds. The U.S. offers two types of savings bonds, EE and I series. Both of these bonds will give you tax free interest if they are used to pay for qualified higher education costs.

Lastly, a properly managed taxable brokerage account can be great for long term savings. You want investments that have low turnover and preferably low dividend or interest income as well to reduce tax drag and maximize compounding. But, in the end you will pay only long term capital gains taxes on the investments, and you use the tuition deduction to effectively offset up to $4,000 in income each year.

Know that there is a lot of fine print for these. For example, these benefits are not given if your household is above certain income limits, so be sure to do a little reading or run your ideas by a financial advisor before committing.

For those that want more details on these topics, check out our 3 part college savings series:

Matt Hylland